In this photo taken Sept. 27, 2006, high-voltage electric transmission lines are silhouetted against the late day sky near a wind farm in Spearville, Kan. A proposed high-voltage transmission line to carry electricity from Kansas wind farms to the eastern United States is facing opposition from landowners along the route. (AP Photo/Charlie Riedel)

The Electric Reliability Council of Texas (ERCOT), the electric grid that serves most of Texas, set back-to-back hourly system-wide peak demand records on Wednesday, July 18, 2018, and for the first time exceeded 72,000 MW of electricity demand. This high demand temporarily triggered very high wholesale electricity prices in some locations exceeding $4,000/MWh, or $4/kWh. By comparison, average residential rates are about $0.10/kWh.

This record is likely to soon be exceeded, perhaps multiple times as 100F+ degree temperatures are expected to continue as the week progresses. About 50% of ERCOT’s summer peak demand is from residential demand, mostly air-conditioning, which is a direct function of outdoor temperatures.

UPDATE: ERCOT did set a new system-wide peak demand on Thursday, July 19, 2018 at over 73,000 MW. Day ahead markets are forecasting even higher demand for Friday.

ERCOT customer class breakdown during low and high demand.ERCOT

Pro tip: if you want to predict high demand and high prices in ERCOT, look for times when afternoon temperatures in Dallas exceeds 104F, Austin/San Antonio breaks 102F, and Houston toys with hitting 100F, simultaneously.

High demand and associated high prices sometimes make news, but the Texas grid is under significantly more scrutiny this year than in times past, for two main reasons; 1) coal plant retirements and 2) continued questions about the efficacy of its energy-only market.

In the past year, about 25% of the Texas coal fleet retired. A combination of low natural gas prices, and to a lesser extent, large amounts of renewable energy, mainly wind, has kept wholesale market prices so low for so long that many older generators are unable to turn a profit. This has been generally good for consumers, since the retirement of older, more expensive (mostly) coal plants means that only the cheapest generators remain online and prices stay low – not to mention that the air also stays cleaner.

Unlike most other grids in the U.S., ERCOT is an energy-only market. In an energy-only market, power plants are only compensated if they provide power (or ancillary services) to the market. In other words, if they are not making electricity, they are not getting paid. Other grids have both energy and capacity markets. Capacity markets provide payments to power plants (usually through an auction process) to be available to provide power just in case they are needed.

Because of its energy-only market structure, Texas has less power generating capacity than it might otherwise would with a capacity market. Couple less available power supply with a booming economy, and add a prolonged heatwave, and you get our current situation: tight reserves and price spikes.

Very high prices do not necessarily indicate that the system is broken, however. In fact, they could just as well be an indication of a healthy market. Power plants in energy-only markets rely on high prices during some parts of the year to make up for lower prices during others.

So is this record-breaking power usage significant? Yes, but it’s nothing to be concerned about, at least not yet. There are plenty of hot days to come, and anything can happen, but ERCOT has more tricks up its sleeve to make sure that the lights stay on this summer. Interruptible load contracts with commercial and industrial customers, and thermostat control programs that allow customers to voluntarily cut back their power usage are likely to play significant roles in the days to come, reducing demand when generation reserves get tight.

While all this is going on, we are also having a national level conversation about the future of our electricity supply. Multiple attempts have been (and are being) made to subsidize certain coal and nuclear power plants in regions where they have become uneconomic. These extra-market efforts are being conducted in the name of grid and national security.

The first attempt looked to leverage the Federal Energy Regulatory Commission (FERC) authority to provide subsidies to power plants that could store 90 days of fuel on-site. Though ERCOT would have been exempt from this rule, had it been enacted, because the Texas grid doesn’t cross state lines and thus is not under federal (FERC) jurisdiction, it is still of concern to supporters of competitive markets. In the end, FERC wisely dismissed the proposal.

The second, and current, attempt aims at using the relatively obscure and seldom deployed Defense Production Act to subsidize coal and nuclear plants on the grounds that is necessary to maintain national security, but the legal standing has yet to be proven. ERCOT could, conceivably, be affected by this proposal.

That said, ERCOT is unlikely to be seriously affected by national energy politics, partly because of its energy mix. At the start of 2018, ERCOT’s capacity mix was 53% natural gas, 21% coal, 20% wind, 5% nuclear, and 2% other. But the large coal retirements referenced earlier mean there is now more wind capacity than coal capacity in Texas. Sustained low natural gas prices and high production are also likely to keep Texas’ power secure. And, because natural gas plants can be turned on and ramp faster than coal-fired facilities, Texas is well-poised to continue increasing its share of variable renewable generation.

In the end, the ERCOT market’s best traits can also be perceived as its worst. The energy-only market forces the system to run lean and efficient, but it also creates uncertainty. Then again, if the cost of lower average prices is occasionally higher peak prices, it could a good trade-off. Energy-only market are designed to provide energy at a lower overall cost – even if that lower cost comes with higher stress.

I am a Research Associate at the Energy Institute and the Webber Energy Group at the University of Texas at Austin. My current research is in the area of spatial system-level applications and impacts of energy efficiency, resource planning, distributed generation, and energ...